Stocks Plunge on IBM Earnings Miss, Bearish Housing Data; Crude Drops on Bearish EIA ReportCrude oil prices dropped sharply on Wednesday following the release of a bearish government report. According to the U.S. Energy Information Administration, U.S. commercial crude stockpiles rose by 6.5 million barrels during the week-ending October 12. Traders were looking for a build of about 2.2 million barrels.
Renewed selling pressure is driving the major U.S. stock indexes sharply lower early Wednesday. Sellers took control shortly before the cash market opening, but the handwriting was on the wall during the pre-market futures session when the market failed to follow-through to the upside following yesterday’s stellar performance.
Most investors were expecting a higher opening on the back of yesterday’s strong earnings report from Netflix, which was reported after the closing bell. However, given the bearish tone in the marketplace after last week’s steep sell-off, investors instead chose to react to a bad report from IBM.
After the bell on Tuesday, IBM reported mixed quarterly results, with earnings topping estimates and revenue missing. The results sent shares down by more than 7 percent, off-setting strong earnings from other companies.
The reaction to the IBM miss was surprising because the stock had been weak all year. To some, it is considered an “old school” technology stock so to see the market react to its bad news may have caught investors off-guard, fueling today’s negative reaction.
Although we’re not calling for the end of the bull market, we are starting to see signs of a major top. The first move down in the topping process is long liquidation. This move took place last week. The second move is a 50% to 61.8% retracement of the first break. The NASDAQ Composite completed this move on Tuesday, but the S&P 500 Index and Dow Jones Industrial Average did not.
On the second move, short sellers usually show up to stop the rally. We may be witnessing this process today. Furthermore, we could see an even steeper decline than last week’s move if this sell-off continues because it will be fueled by both short-selling and long-liquidation.
Investors have to be prepared in order to protect profits and traders need to watch the price action because this may be an even better shorting opportunity than last week’s steep declines.
U.S. Housing Report
Weak housing data may be contributing to today’s early session sell-off. On the data front, housing starts fell 5.3 percent last month, more than expected. The weakness was likely fueled by price inflation and higher mortgage rates.
The below par data triggered a slew of downgrades in housing stocks and companies related to housing such as Home Depot and Lowe’s. Both stocks fell more than 4.5 percent, while builders like KB Home and Lennar fell 4.3 percent and 3.2 percent, respectively.
U.S. Energy Information Administration Weekly Inventories Report
Crude oil prices dropped sharply on Wednesday following the release of a bearish government report. According to the U.S. Energy Information Administration, U.S. commercial crude stockpiles rose by 6.5 million barrels during the week-ending October 12. Traders were looking for a build of about 2.2 million barrels.
Gasoline stocks fell by 2 million barrels, compared to a forecast of a 1.1 million-barrel decline. Distillate stockpiles fell by 827,000 barrels, versus a 1.3 million-barrel drop, the EIA data showed.